In the summer, the State Legislature of California passed California Senate Bill 94 which effectively consolidated the two separate licensing regimes for medicinal cannabis regulations (the Medical Cannabis Regulation and Safety Act (“MCRSA”)) and recreational cannabis regulations (Adult Use of Marijuana Act (“AUMA”)) in the State of California.1 As a result the State of California recently adopted emergency cannabis regulations to implement Senate Bill 94, by repealing MCRSA and created a unified licensing and regulatory regime known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”).

Under MAUCRSA there will now be a single regulatory regime for “commercial cannabis” activity in the State of California. Commercial cannabis activity includes the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery, or sale of cannabis and cannabis products; and, does not include personal use cultivation that is done at a private residence or by a patient or primary caregiver, in each case in accordance with applicable California health and safety codes. Beginning January 1, 2018 all commercial cannabis activity shall be conducted between licensees under MAUCRSA.

The primary State agencies involved with regulating commercial cannabis activity will be:

Bureau of Cannabis Control California: responsible for developing regulations for medical and adult-use cannabis in California. The Bureau is responsible for licensing retailers, distributors, testing laboratories, microbusinesses and temporary cannabis events;

California Department of Food and Agriculture: responsible for regulating cultivators and implementing the “track and trace” system; and

California Department of Public Health: responsible for regulating manufacturers

MAUCRSA is a lengthy piece of legislation. Below is an overview of the licensing regime that will be coming into effect in California as of January 1, 2018 that cannabis industry participants should be aware of. It is important to note that while MAUCRSA is meant to implement a comprehensive regulatory regime for commercial cannabis activity, MAUCRSA allows each local jurisdiction within the State to have control over commercial cannabis activity by determining if any local license, permit, or other authorization is required to be issued by such local jurisdiction (more on this point below, see “Licensing – General Licensing Requirements – Local Jurisdiction Compliance”).

All businesses conducting commercial cannabis activity are required to be licensed. A separate license is required for each location (premises) where the business engages in commercial cannabis activity.

B. How many licenses can be possessed?

The Bureau of Cannabis Control California (the “Bureau”) does not have any caps on the number of licenses that may be obtained. However, caps may be set by a local jurisdiction.

C. What are the types of licenses?

Categories

There are two categories under which a license may be obtained: adult-use (A-License) and medicinal (M-License) available.

All licenses under MAUCRSA will be either for medicinal (M) or adult-use (A), and not both.

MAUCRSA allows for same person to hold both types of licenses, provided the licensed premises are separate and distinct.

Any person involved in commercial cannabis activity must possess the appropriate license type.

In addition to the appropriate license type for the category of commercial cannabis activity, the appropriate type of sub-license must also be obtained.

Testing licenses are designated Type 8 and no A-License of M-License is required.

Sub-Types

Retail and Distribution

With respect to retail and distribution there are 6 subtypes of licenses available from the Bureau:

Non-Storefront Retailer (Type 9)

Retailer (Type 10)

Distributor (Type 11)

Microbusiness (Type 12)

Distributor Transport Only (Type 13)

Cannabis Event Organizer/Temporary Cannabis Event (Type 14)

Manufacturing

With respect to commercial cannabis manufacturing, the licenses cover extraction of cannabis compounds from plant matter, infusion, and compounding. There are 4 subtypes of licenses available from The California Department of Public Health (“CDPH”):

extraction using a non-volatile solvent or mechanical method3 (Type 6)

The CDPH is currently developing an additional license type, Type S, which will allow businesses to share facility space. It is anticipated that this will reduce barriers to entry into the commercial cannabis market in California.

Cultivation

There are 17 types of cannabis cultivation licenses available from The California Department of Food and Agriculture (“CDFA”):

Specialty Cottage Outdoor: an outdoor cultivation site with up to 25 mature plants

Specialty Indoor: an indoor cultivation site of between 501 and 5,000 square feet of total canopy

Specialty Cottage Indoor: an indoor cultivation site with up to 500 square feet or less of total canopy

Specialty Outdoor: an outdoor cultivation site with 5,000 square feet or less of total canopy or up to 50 mature plants on non-contiguous plots

Specialty Cottage Mixed-Light: a mixed-light cultivation site with 2,500 square feet or less of total canopy

Small Mixed-Light: a mixed-light cultivation site of between 5,001 and 10,000 square feet of total canopy

Large Mixed-Light: for cultivation using a combination of natural and supplemental artificial lighting at a maximum threshold (to be determined by the CDFA) for more than 22,000 square feet of total canopy size on one premises (the CDFA will not issue Large Mixed-Light licenses prior to January 1, 2023)

Specialty Mixed-Light: a mixed-light cultivation site of between 2,501 and 5,000 square feet of total canopy

Medium Mixed-Light: a mixed-light cultivation site of between 10,001 and 22,000 square feet of total canopy

Small Indoor: an indoor cultivation site of between 5,001 and 10,000 square feet of total canopy

Medium Indoor: an indoor cultivation sire of between 10,001 and 22,000 square feet

Large Indoor: for indoor cultivation that exclusively uses artificial lighting for more than 22,000 square feet of total canopy size on one premises (the CDFA will not issue Large Indoor licenses prior to January 1, 2023)

Small Outdoor: an outdoor cultivation site of between 5,001 and 10,000 square feet of total canopy

Medium Outdoor: an outdoor cultivation site of between 10,001 square feet and 1 acre of total canopy

Large Outdoor: for outdoor cultivation that uses no artificial lighting for more than 1 acre of total canopy size on one premises (the CDFA will not issue Large Outdoor licenses prior to January 1, 2023)

Nursery: cultivation of cannabis solely as a nursery

Processor: a cultivation site that conducts only trimming, drying, curing, grading or packaging of cannabis and non-manufactured cannabis products

D. Are there any restrictions on the type of license that can be possessed?

A person that holds a testing laboratory license is prohibited from licensure for any other activity, except testing; and

A testing laboratory is also prohibited from employing an individual who is also employed by any other licensee except for another testing laboratory licensee.

2. General License Requirements

A. Owners

MAUCRSA requires that each applicant have at least one member that meets the definition of “owner”. Under MAUCRSA an owner means:

anyone with an aggregate ownership interest of 20% or more in the applicant, unless the interest is solely a security, lien, or encumbrance;

the chief executive officer;

any member of the board of directors;

an individual participating in the direction, control, or management of the applicant, including:

a general partner of a cannabis business that is organized as a partnership;

a non-member manager or managing member of a limited liability company of a cannabis business organized as a limited liability company; and

an officer or director of a cannabis business that is organized as a corporation.

Each owner of the entity applying for a license is required to submit fingerprint images and background checks to the Department of Justice.

B. Financial interests

Persons with a “financial interest” in the cannabis business must be disclosed on the application, but are not subject to the same requirements as owners (i.e. fingerprint and background check requirements).

For the purposes of MAUCRSA, financial interest means any person that, has made an investment into a commercial cannabis business, provided a loan provided to a commercial cannabis business, or has any other equity interest in a commercial cannabis business.

The following holders of financial interests are not required to be listed: (a) a bank or financial institution whose interest constitutes a loan; (b) individuals whose only financial interest in the commercial cannabis business is through an interest in a diversified mutual fund, blind trust, or similar instrument; (c) individuals whose only financial interest is a security interest, lien, or encumbrance on property that will be used by the commercial cannabis business; and (d) individuals who hold a share of stock that is less than 5 percent of the total shares in a publicly traded company.

C. Local Jurisdiction Compliance

MAUCRSA allows each local jurisdiction within the State to have control over commercial cannabis activity by determining if any local license, permit, or other authorization is required to be issued by such local jurisdiction. An applicant is not required to demonstrate local jurisdiction authorization as a pre-requisite to obtaining a state license. Under the MAUCRSA, an applicant may voluntarily provide proof of local authorization to verify compliance with local law, but is not required to do so. There are typically two routes to comply to satisfy the Bureau of local jurisdiction compliance:

Submission of Application with Proof of Compliance: When a license, permit, or other authorization issued by the local jurisdiction is submitted with the application to demonstrate compliance with local ordinances and regulations, the Bureau will contact the local jurisdiction and if there is no response within 10 calendar days the Bureau considers the authorization valid; or

Submission of Application without Proof of Compliance: When a license, permit, or other authorization issued by the local jurisdiction is not submitted with the application to demonstrate compliance with local ordinances and regulations, the Bureau notifies the local jurisdiction and if no response is received within 60 business days the Bureau presumes compliance. However, if there is a response from the local jurisdiction after 60 business days that the applicant is not compliant, the Bureau may commence disciplinary action.

While MAUCRSA creates a unified state-wide system for the regulation of commercial cannabis activity, it allows for discretion at the local jurisdiction level which may create some uncertainty.

D. Premises

Each premises requires a license and only one licensee may occupy a premises, with the exception that a licensee holding both an A-License and M-License for the same commercial cannabis activity may have the same premises for both types. In addition, a diagram of the premises is required with the application and the applicant must provide proof that the landowner of the land upon which a premises is located has provided approval for the cannabis activity to be conducted.

E. Surety Bond

All applicants must have a $5,000 surety bond payable to the State of California to cover the cost of destruction of cannabis goods.

F. Track and Trace

All applicants must enter certain events into the track and trace system, administered by the CDFA, so that cannabis is tracked throughout the supply chain.

3. Specific License Requirements – Retail (Type 9 and Type 10)

A Non-Storefront Retailer (Type 9), sells and delivers cannabis goods to customers and must have a licensed premises that is not open to the public. A storefront Retailer (Type 10), sells cannabis goods to customers at its premises or by delivery, and must have a licensed premises. In addition to the A-License and/or M-License, and as applicable, the following requirements are necessary in connection with the grant of a license

cannot be located within 600 feet of a school (grades K-12, day care, or youth center) unless permitted by the local jurisdiction or state.6

sales and deliveries may only occur between 6:00 a.m. and 10:00 p.m. Pacific Time.

all cannabis goods must be placed in an opaque exit package prior to leaving the premises.

retailer cannot accept, possess, or sell cannabis goods if they are not packaged as they will be sold at final sale.

tobacco and alcohol sales are prohibited at a licensed commercial cannabis premises.7

deliveries may be made only by employees of the retailer and must be made to a physical address.

retailer must be able to immediately local all delivery vehicles.

delivery vehicle may not contain more than $3,000 of cannabis good at any time.

adult-use cannabis sales are limited to adults 21 years and over.

retailer must have 24-hour surveillance.

adult-use customers can buy up to 28.5 grams (one ounce) of non-concentrated cannabis, eight grams of concentrate and six immature plants.

advertising is permitted where at least 71.6 percent of the audience “is reasonably expected to be 21 years of age or older.”

online advertising requires visitors to confirm age compliance.

4. Specific License Requirements – Distribution (Type 11 and Type 13)

A. Activities

A Distributor (Type 11) is responsible for transporting cannabis goods, arranging for testing of cannabis goods, conducting quality assurance review of cannabis goods to ensure they comply with all packaging and labeling requirements and storage of cannabis goods.

A transport only Distributor (Type 13) allows a licensee to transport cannabis goods between licensed cultivators, manufacturers, and distributors. A transport only Distributor may not transport cannabis goods to a licensed retailer (except for immature live plants and seeds being transported from a licensed nursery) and may not engage in any other distributor activities.

B. Transport

A Distributor must also:

have a seller’s permit issued by the California Department of Tax and Fee Administration;

have transport vehicles with an alarm system;

not transport medicinal and adult-use cannabis goods together unless they are clearly identified;

generate a shipping manifest prior to transporting;

have a motor carrier permit if transporting for hire;

ensure no person under 21 in the transport vehicle or trailer;

ensure only a licensee or employee is in the transport vehicle at any time; and

ensure cannabis goods are not visible or identifiable during transport.

C. Insurance

Distributors must carry and maintain commercial general liability insurance in the aggregate in an amount no less than $2 million and in an amount no less than $1 million for each loss.

5. Specific License Requirements – Microbusiness (Type 12)

A Microbusiness Type 12 license allows an applicant to engage in multiple cannabis activities on the same premises. A Microbusiness licensee is permitted to engage in cultivation (on an area less than 10,000 square feet), act as a licensed distributor, a manufacturer using non-volatile solvents (Type 6) and/or as a retailer.

A Microbusiness must:

engage in at least 3 of the 4 activities (i.e. cultivation, distribution, manufacturing and retail).

must describe in the application the operating procedures it will employ for each activity.

must comply with all requirements for each activity in which it proposes to engage.

If the license of a Microbusiness is revoked or suspended, it affects every activity done using that license.

Under MAUCRSA, cannabis events may be held for up to 4 days. However, only an event organizer with a Type 14 license will be granted a license by the Bureau to hold a cannabis event. At a licensed Temporary Cannabis Event, the onsite sale and consumption of cannabis goods is permitted, however:

sales of cannabis goods must be performed by a retailer or microbusiness approved to engage in retail.

access to the area(s) where sales and/or consumption occurs is restricted to persons 21 years of age or older.

consumption of alcohol or tobacco is not allowed on the premises.

onsite consumption of cannabis goods must be done in accordance with the local jurisdiction’s requirements.

security must be present at the event.

7. Specific License Requirements – Testing Laboratories (Type 8)

All cannabis goods produced must be safe for consumption and all commercial cannabis operations must have its cannabis products tested by a licensed Testing Laboratory.

Testing Laboratories do not require an A-License or M-License.

Testing laboratories must:

obtain and maintain ISO/IEC 17025 accreditation; however, Testing laboratories may be issued a provisional license allowing them to operate while they obtain ISO/IEC 17025 accreditation, provided they meet all other licensure requirements.

collect samples of the cannabis products from the distributors premises.

develop and implement a chain of custody protocol to document the transportation, handling, storage, and destruction of samples.

test the cannabis products for:

cannabinoids

foreign material

heavy metals

microbial impurities

mycotoxins

moisture content and water activity

residual pesticides

residual solvents and processing chemicals

terpenoids

homogeneity

generate a certificate of analysis for each primary sample the lab analyzes.

8. Manufacturing

In addition to obtaining the appropriate license, manufacturers ensure they meet the operational requirements mandated by the CDPH under MAUCRSA. Some of the more pertinent requirements are as follows:

Operational Requirements: Licensees must have written procedures for inventory control, quality control, transportation, security and cannabis waste disposal. Descriptions of these procedures or Standard Operating Procedures (“SOPs”) must be submitted with the annual license application. Cannabis waste cannot be sold, must be placed in a secured area and be disposed of according to applicable waste management laws. Good manufacturing practices must be followed to ensure production occurs in a sanitary and hazard-free environment, cannabis products are contaminant free and THC levels are consistent throughout the product and within required limits. Extractions using CO2 or a volatile solvent must be conducted using a closed-loop system, certified by a California-licensed engineer. Volatile, hydrocarbon-based solvents must have at least 99% purity. Finally, volatile solvent, CO2 and ethanol extractions must be certified by the local fire code official.

Product Standards and Prohibited Products: Products cannot be infused with nicotine or alcohol or have added caffeine. Edible products cannot be shaped like a human, animal, insect, or fruit. Some potentially-hazardous foods, such as meat and seafood, and other products requiring refrigeration, are prohibited for sale as cannabis products. Juice and dried meat made in accordance with requirements are allowed. Perishable ingredients, such as eggs and milk, may be used as long as the final product meets regulatory standards.

THC Limits: Edible products are limited to a maximum of 10 mg of THC per serving and 100 mg of THC per package. Other cannabis products, such as tinctures, capsules and topicals, are limited to a maximum of 1,000 mg per package for the adult-use market and 2,000 mg of THC per package for the medicinal-use market.

Packaging and Labeling: Cannabis product packaging cannot resemble traditionally available food packages, and edibles packaging must be opaque. All manufactured products must be packaged before they are released to a distributor. In addition to these requirements, statute requires that cannabis product packaging not be attractive to children and be tamper-evident, re-sealable if the product includes multiple servings, and child-resistant. Cannabis product labels must include an ingredient list, some nutritional facts and the CDPH-issued universal symbol. The label may not refer to the product as a candy. In addition to these requirements, statute requires that labels not be attractive to individuals under age 21 and include mandated warning statements and the amount of THC content.

9. Cultivation

In addition to obtaining the appropriate license, cultivators must register for the State mandated track-and-trace system.8 Licensees have 30 business days, from the grant of its license, to move all inventory into the system after receipt of unique identifiers.

It is important to note that the CDFA will not issue a license for cultivation in a local jurisdiction that has banned cannabis cultivation.

The Takeaway

Despite the fact that MAUCRSA creates a unified State regulatory system for commercial cannabis activity, the legislation seems to leave a large burden of licensure on local jurisdictions. While MAUCRSA provides a clear roadmap as to what will be required for licensure at the State level, there is uncertainty for commercial cannabis market participants in California as to what extent each local jurisdiction will prohibit or welcome commercial cannabis activity and how aggressively it will regulate through local ordinances and regulations.

In addition, foreign ownership may be possible as there are no residency requirements for licensees; however, local county and city jurisdictions may still impose their own residency requirements.

If you are interested in discussing the above further please contact Daniel D. Nauth at 416-477-6031 or at dnauth@nauth.com.

1 The Medical Cannabis Regulation and Safety Act was passed by the California Legislature in 2015 and it created a new regulatory scheme to license and regulate the medical cannabis industry. The Adult Use of Marijuana Act was passed by the voters in 2016 and it created a new regulatory scheme to license and regulate the non-medical cannabis industry.

2 We have not covered the Temporary Permits and Transitional Rules under MAUCRSA for commercial cannabis operations in effect, and appropriately licensed, prior to the adoption of MAUCRSA.

8 The CDFA is developing a track-and-trace system for both medicinal and adult-use cannabis that all commercial cannabis licensees in California will be required to use. This system will record the movement of cannabis and cannabis products through the supply chain—from cultivation to sale—which will help ensure that if a public safety concern arises, the source will be identifiable. The track-and-trace system also will help prevent black-market cannabis products from entering the regulated market, and likewise help prevent regulated cannabis products from being diverted into the black market. The State has selected Franwell Inc. as the state’s cannabis track-and-trace vendor.